Practical Implications of a Transition to IFRS Joel O snoss

1. Practical Implications of a Transition to IFRSJoel Osnoss Bogota Colombia August 31, 2011

2. Background • Benefits and challenges • Best practices • Some high-level advice • Final thoughts • Agenda

3. Background

4. Background: Status of IFRS Usage IFRS is widely spread across the globe • Required of public companies in 100+ countries • Used by more than 40% of the global Fortune 500 • More coming on-line 2011 through 2012 including • Argentina, Mexico, India, Korea • IFRS for SMEs • Starting to see interest from private entities • Basis for statutory reporting in some countries

5. Transition in the US Current Landscape • SEC issued a statement in February 2010 • Supports one set of global accounting standards • IFRS is best positioned • Initiated a “Work Plan” • Staff Paper issued May 26, 2011 • Possible IFRS “incorporation” over 5 to 7 years • Possible earlier option to adopt • On track to make decision later this year • Japan may decide based on SEC’s decision • Non-US companies that file with the SEC are already permitted to use IFRS

6. Background: IFRS Overview • Key characteristics of IFRS • Principles-based approach that places greater emphasis on interpretation and application of principles, with a particular focus on the spirit of the principle being applied • The standards necessitate the assessment of the substance of transactions and an evaluation of whether the accounting presentation reflects the economic reality • Focus on the need for professional judgment in arriving at accounting conclusions • Greater use of fair value as a measurement basis placing emphasis on obtaining reliable measurements • More extensive disclosure requirements

7. Background: Putting principles into action • More comparability under IFRS will impact investor expectations… U.S. GAAP Other GAAPs IFRS 7

8. Benefits and challenges

9. Benefits / Challenges Benefits and challenges can be considered from the following different perspectives: • Technical accounting and financial reporting • Process and statutory reporting • Technology infrastructure • Organizational

10. Benefits and challenges of IFRS implementation Technical accounting and financial reporting • Benefits: • Enhanced comparability— Global investors want the comparability of a single set of accounting standards • Easier access to capital – IFRS is a “global passport” • Easier M&A – No need to reconcile buyer and seller • Challenges: • Robust financial reporting requirements – IFRS requires additional disclosure; may be more restrictive in certain areas • Objective application — Cultural bias can be an issue • Moving target — Additional complexities due to changes in IFRS • But it goes beyond accounting and financial reporting…

11. Beyond accounting and financial reporting… Process and statutory reporting • Benefits: • Standardized reporting — Streamline management reporting, including bonus systems; transform statutory and tax reporting • Reduction in consolidation adjustments – Conformed IFRS policies reduce the number of adjustments needed • Internal controls – Opportunity to improve controls / processes Benefits • Challenges: • Policies of overseas group entities – The extent of accounting policy alignment if some subsidiaries have adopted IFRS • Management and internal reporting – Aligning internal and external reporting may require significant effort • Internal controls — Changes to processes and systems could impact control effectiveness

12. Beyond accounting and financial reporting (continued)… Technology infrastructure • Benefits: • Integrated systems — Opportunity to reduce the number of ledgers and systems being used • Update legacy systems — Gain efficiencies by replacing disjointed legacy systems with enterprise-wide systems Benefits • Challenges: • Dual reporting — Maintaining multiple accounting frameworks during transition • IFRS compatibility — Current or planned systems may not be “IFRS ready”

13. Beyond accounting and financial reporting (continued)… Organizational • Benefits: • Efficient use of resources — Consistent accounting policies can lead to cost savings through shared services, greater mobility of accounting personnel and standardized reporting • Access to capital markets — IFRS facilitates easier access • Tax and treasury — Consider strategic tax alternatives, cash tax impacts, and opportunities to enhance subsidiary distributable reserves Benefits • Challenges: • Cooperation — Potential difficulties in achieving convergence of non-controlled interests • Employee commitment — Significant training and communication is often required • Contracts — Impact on debt covenants, bonus and compensation arrangements, revenue contracts, etc. • Taxes – impact on tax structures, potential loss of benefits and volatility in tax provisions and the effective tax rate Challenges

14. Observations Lessons learned • Overall approach was to minimize differences from local GAAP • Variety of performance measures were used • Increased disclosure in financial statements • Judgments made and risk disclosures • Use of IFRS 1 exemptions • Business combinations, CTA and pension exemptions widely used • Significant impact on results • Asset impairments, “split accounting” and components were significant issues • Effort was underestimated • Lead time from announcement to reporting date was short • Late start often resulted in escalation of costs, especially after transition date • Some companies did not achieve “business as usual” state for IFRS reporting • Often a lack of a holistic approach, taking collateral effects into consideration • Hard to get it right the first time • Several companies are only now starting to explore benefits from IFRS implementation The EU experience

15. Best practices

16. Illustrative adoption timeline Reporting Date Transition Date Step 5 • Transition to IFRS • Interim Reporting • Investor Communications Step 4 • Transition to IFRS • Interim Reporting • Investor Communications Step 3 • Local GAAP and IFRS opening balance • Investor Communications • Audit Procedures • Change Standards • Local GAAP and IFRS opening balance • Investor Communications • Audit Procedures • Change Standards • Statutory Implementation • Select Exemptions • Prepare IFRS Opening Balance sheet • “Dry Runs” Step 2 • Statutory Implementation • Select Exemptions • Prepare IFRS Opening Balance sheet • “Dry Runs” IFRS Competence • Targeted Statutory Implementation • System and Process redesign Step 1 • Targeted Statutory Implementation • System and Process redesign • Awareness • Assessment • Planning • Initial Training • Roadmap • Awareness • Assessment • Planning • Initial Training • Roadmap Alignment with other initiatives and training for appropriate personnel Rationalization and standardization of statutory reporting

17. Potential near-term action steps • We have identified the following areas where companies can get started:

18. Potential near-term action steps (continued)

19. Some High-level advice andfinal words

20. Some High-Level Advice Prepare for Macro-implications • IFRS is global • Regulators are communicating and cooperating • SEC; European Securities and Markets Authority (ESMA); International Organization of Securities Commissions (IOSCO) • Analysts and investors will expect consistency and transparency • Industry participants are communicating • Your financial statements may be read and understood anywhere • Decisions made in London can be felt in Peru • Standards based on principles: • Require discipline over judgments • Necessitate robust disclosure around judgments • Do not permit the ability to say “tell me where it says I can’t do this!”

21. Some High-Level Advice Implement a Judgment Framework • Discipline over principles-based accounting • A balanced approach to accounting and disclosure • Committee on Improvements to Financial Reporting (CIFiR) Recommendations: • Analyze business purpose and substance of transactions • Identify all relevant accounting research • Consider alternatives based upon investor needs • Seek input from multiple individuals with expertise • Consistent application of accounting judgments based upon reliable assumptions and estimates

22. Some High-Level Advice Areas Most Subject to Judgment: • Revenue recognition • Provisions • Business combinations • Consolidation • Impairment of assets • Employee benefits • Financial instruments

23. Some High-Level Advice Prepare for new IFRSs • Monitor IASB meetings • Share information within your industry • Stay abreast of current publications/ thought pieces • Participate in IASB outreach activities • Comment letters • Roundtables • Field testing • Communication is critical (internal and external)

24. Some High-Level Advice Monitor Continuing Developments • Pace of standard-setting unprecedented • Stakeholders expressed concern over due process • The IASB and FASB pressured to re-expose • Revenue recognition and leasing will be re-exposed • Insurance and parts of financial instruments likely re-exposed • Target completion dates updated • Recently issued IASB proposals • Defer mandatory effective date of IFRS 9 to 2015 from 2013 • Agenda consultation • Effective dates of major projects could be 2015 or 2016

25. Updated IASB Work Plan

26. Final Thoughts to Leave You With IFRS is Going to Be the Universal Accounting Language • IFRS is the global passport to capital • There is a global focus on IFRS by regulators • Prepare now to adopt properly • Set the “tone at the top” of the organization • Implement a judgment framework • Follow IASB activities and get involved • A global perspective is essential to a successful implementation

27. Questions?